Starting a business from scratch can be exciting and frightening at the same time. One of the concerns will inevitably be around corporate tax liabilities.
Tax planning should be incorporated in your thinking from the outset because your company’s tax liabilities will be determined in relation to the type of business you register. Sole traders and partnerships don’t pay tax.
Business owners that are entering a high-risk industry are best advised to set up as a limited liability company (LLC). Although this involves paying more taxes, the individual property of the board is not in jeopardy should the business fail.
When you run a limited company, everything is owned by the company and taxes are paid in relation to profits together with director and staff salaries.
Types of taxes owed by limited company
Filing tax returns as a limited company is more complex than the Self-Assessment Tax Return forms (SA100) you would fill in as a sole trader or partnership.
Directors of a limited company still need to lodge an SA100 with HMRC if you receive dividends or receive income from other sources such as renting a house or from overseas ventures.
Most company directors are remunerated through a combination of a basic salary and dividends drawn at the end of the financial year. The first £5000 of dividends is tax-free and you do not have to pay National Insurance on them.
You will be liable for NI contributions if you receive more than £162.01 as a salary. NI is deducted from your earnings under Class 1. Employee NI contributions are also Class 1 and paid by the company through the PAYE scheme.
Limited companies pay corporation tax at 19% of the total profits for the year 2018/209. From 1 Aril 2020, this will be reduced to 18%. You must register for corporation tax with HMRC when you first set up the business.
Tax forms must be submitted to the tax office within nine months and one day after the end of the previous tax year. So, if you’re starting a business in 2019, the tax year will end on 31st March 2020. Your tax return is due before 1st January 2021.
Profits that are subject to corporation tax include takings from your usual business practices together with investments and sale of assets. Post-Brexit there may also be additional levies to pay on import and export transactions.
Corporate tax liabilities can be complicated to manage so it is advisable to speak with a qualified accountant and seek legal advice from an international firm that specialises in UK Corporate Tax Laws and Regulations.
Regardless of what your company status is, any business that makes profits exceeding £85,000 over a 12-month period is obligated to register for VAT.
As a general rule, VAT in the UK is charged at 20%, however, some items are exempt or partially exempt. Utility bills, for example, is charged at 5% VAT. If you acquire or create a capital asset, you will also need to adjust your net VAT.
Corporate tax planning is complicated, so it is advisable to seek professional help rather than attempting to manage it by yourself. Companies that make an error on their tax return forms may be subjected to an HMRC tax penalty.
On the flip side, if you organise your tax affairs early, HMRC will return some of it as interest.